June 25, 2007 / 9:33 AM / 11 years ago

Sterling hits $2 as investors expect rate hike

LONDON (Reuters) - The pound popped above the psychologically important $2 level versus the dollar on Monday for the first time since May 1, as investors anticipate a rate hike in July rather than August.

Ten pound notes are counted in an undated file photo. The pound rose briefly above the psychologically-key $2 level versus the dollar on Monday for the first time since May 1, as investors anticipate a British rate hike in July rather than August. REUTERS/File

Bank of England minutes released last week showed that four of its nine-strong monetary policy committee — including Governor Mervyn King — voted for a rate hike this month, wrong -footing investors who had only expected two dissenters from the decision to hold rates steady at 5.5 percent.

A Reuters poll taken after the minutes showed 44 of 64 economists surveyed now expect an interest rate hike in July, keeping the pound a favoured destination for the carry trade.

“Cable has recovered from its lows because of a change in interest rate expectations,” said Paul Mackel, senior currency strategist at HSBC.

The carry trade, in which investors borrow low-yielding currencies like the yen to invest in assets with higher returns, has supported sterling. The pound has gained 8 percent versus the dollar since this time last year.

At 3:12 p.m., the pound was trading at $1.9990, just off the session high of $2.0006. The euro was steady at 67.35 pence.

Sterling rose to as high as 105 against a basket of currencies, its highest since mid-February.

The market is pricing in two further interest rate increases this year which will take rates to 6 percent.

However, the strong pound may take some of the pressure off the Bank of England to raise rates.

“The strength of the pound may modestly dilute the need for rates to go markedly higher,” said Howard Archer, Chief UK and European Economist at Global Insight. “However, much will still depend on companies’ pricing policies and power, the strength of consumer spending and wage developments.”

Later this week, investors will look to CBI distributive trade data and final first quarter GDP figures for clues on how the UK economy is performing and whether four interest rate hikes since August are starting to bite.

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